Fix Or Not To Fix & Do We Rate-Lock?
Do we now lock in our fixed interest rates to protect ourselves from future increases, or proceed with variable rates? This week, the Reserve Bank of Australia (RBA) did confirm that the official cash rate was holding steady, but they were forced to formally dump its future 0.1 percent three-year bond yield target. Markets reacted instantly with bond yields rising sharply and big banks raising their fixed mortgage interest rates.
Fixed rates have now increased by how much?
Over the last 12-18 months, nearly all of the mortgages written in the industry and even by us here at Black & White Finance had a fixed rate component, as the difference between fixed and variable was too much to not consider.
“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” RBA governor Phillip Lowe said during the week. As a result of the yield target announcement, the markets reacted intensely, see the sharp rise in the 3-year yield here:
Off the back of this news and the data, CBA increased their fixed rates on Friday, with a 40 basis point increase to their 3-year fixed rate for owner-occupiers and a 25 basis point increase to their 2-year fixed rate.
Westpac a few days earlier, also raised theirs, hiking their 3-year fixed rate for owner-occupiers by 21 basis points. A host of other lenders have also increased their fixed rates.
The Reserve Bank of Australia upgraded its economic forecast for 2022, conceding that it could be 2023 that the cash rate and ultimately variable rates move northwards, not in 2024 as originally suggested. These increased fixed rates are a reflection of market expectations.
What is the rest of the world doing?
Central banks worldwide are unwinding their stimulus policies. The Bank of Canada last week dumped a similar bond buying policy, and America’s Federal Reserve announced that it would begin winding down it’s own bond purchases.
The Reserve Bank of New Zealand lifted rates .5 percent last month, and it is widely expected that their rates across the Tasman, will continue to rise again over the next 6 months.
For now, the RBA will continue to buy bonds here in Australia, at least $4 billion each week until at least February to suppress long-term rate rises so there is still a lot of support there from the government to keep our rates down but for how long can this be sustained?
A booming economy
Westpac’s Bill Evans and RBA Governor Philip Lowe both share the same sentiment, our Australian conditions here are different from those overseas, and because of our economic differences, Australia will lag behind the US and other countries in lifting official interest rates (our variable rates). At the end of 2023 the RBA is expecting inflation to just get to 2.5 per cent and wages growth to just get to 3 per cent. The RBA will want to see inflation get sustainably back to 2.5 per cent, and the unemployment rate come down.
With vaccination rates surging, we should see more spending in the economy.
CBA’s weekly debit and credit data showed national spending jumped 20 percent above the corresponding week of 2019.
Economists portray that consumers have roughly $200 billion of extra savings to throw at the economy and as restrictions further ease, and the warmer temperatures get more people out and about, we should see more spending. CBA economist Gareth Aird believes “Australia is heading for a booming economy”. There are other upbeat economists who believe things will be so strong in the next 12 months, that official interest rates (our variable rates) will potentially increase much earlier, in 2022.
Locking fixed rates - 'Rate locking'
Those that are likely to fix their home loan, could consider 'rate locking', to ensure on the day of settlement the fixed rate which has been applied for during the application process, actually is applied and in effect. You cannot rate lock a variable rate home loan. Rate locking can occur when a borrower pays a ‘rate-lock fee’, to lock in the fixed rate on offer at the time of application (or any time before settlement), protecting them from any rate rises during the process.
It is commonly mistaken that when applying for a fixed-rate loan, it’s guaranteed to be that rate on the day of settlement, however, this is only the case if the client pays a "rate lock" fee. The ‘rate-lock’ typically lasts for around 90 days, but this can differ between lenders.
How much is the rate lock fee – is it worth it?
Rate lock fees vary from lender to lender. Some charge .15 per cent of the loan amount, whereas others charge a flat fee of $750. Some lenders don’t even charge to rate lock. It’s a decision that a borrower must consider – it’s a gamble. In a low rate environment, as we’ve been used to for so long, while the option has been available, the risk of rising rates has been very small. Now however, the landscape is extremely different. The problem or question you’re solving or needing to answer, when rate locking is, “what is the likelihood that my lender will increase my fixed rate between my application submission date and my settlement date and as a result, should I pay a fee to lock this rate in and guarantee it”? There is no guarantee rates will rise in the time before settlement, so a borrower can pay the fee unnecessarily and because these rate locks only last 90 days, you need to time it so it doesn’t expire.
Final thoughts
The RBA has a lot to consider and it's a great thing for us Australian's with a lot of debt that they are watching the data closely and not pulling the trigger too early on interest rates. We will continue to pay attention to what each bank is doing, independent of the RBA as the cheap funding and bond purchase programs unwind. If you want to know more about rate locking, rates on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or hit the start today button below.
Reach out to us today
0448 890 186
or
Feedback
We’d love to hear what you think about our content or how we could improve to make your experience better. Please send a note to peter@blackandwhitefinance.com.au to let us know your thoughts.